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View Full Version : China and Russia abandon the dollar in new bilateral trade agreement



BrianW
11-26-2010, 09:30 AM
http://smd12364.newsvine.com/_news/2010/11/25/5525907-china- (http://smd12364.newsvine.com/_news/2010/11/25/5525907-china-and-russia-abandon-the-dollar-in-new-bilateral-trade-agreement-)


China and Russia are renouncing the U.S. dollar for trade, their premiers have announced.
Chinese Premier Wen Jiabao and his Russian counterpart Vladimir Putin said they will now use their own currencies for bilateral trade.
Chinese experts told the China Daily that the move reflects closer relations between the two countries and is aimed at protecting their own domestic economies rather than challenging the dollar.
'So far we have been paying each other in foreign currencies, first of all in dollars. Now, and this is only the first step, trade in the rouble has started in China. In December the yuan will be traded in Moscow,' Putin said.


The analyst on the radio said that this reflects a lack of confidence in the US to get it's financial affairs in order and is a extension of the QE2 debt monetization.


"What this means is that, previously, if Russia wanted to buy something from China, Russia would first convert their money into foreign currency--usually dollars--and then pay China in dollars. The reverse was also true.

Now, China and Russia will deal with each other in their own currencies.

This is not the end of the dollar, but it's a move in that direction. An increasing number of people and countries are losing faith in the long-term strength of the dollar. As long as the dollar was stable--and expected to stay that way--it made sense for Russia and China (and other countries) to demand payment in that stable currency. But in the absence of perceived strength and stability there is very little other countries gain by using the dollar.

This is the kind of thing that will slowly (at first) chip away at the dollar. Now that China and Russia have made this decision, I suspect it's likely they'll both start making similar arrangements with other countries. Once other countries are forced to deal with China and Russia in their own currencies rather than dollars, that's one less reason for those countries to purchase and hold a large number of dollars.

One of the reasons countries have held dollars (and why the dollar is a reserve currency) is because it has been a relatively stable store of value. The other reason is because countries have needed dollars to buy stuff from other countries. But now the dollar's value isn't nearly as stable and countries are beginning to conduct international business in their own currencies. This is going to lead further and further away from the dollar being a reserve currency.

As Americans, why should we care?

Because the fact that other countries have needed dollars to do business with each other has allowed us to print more dollars ourselves, use them to buy things from foreign countries, and then those foreign countries have used the dollars amongst themselves in commercial transactions. So for many years we've been able to literally print dollars and buy real, tangible stuff with it--and it hasn't been inflationary for us because the dollars have largely stayed overseas as those foreign countries use the dollars to trade amongst themselves. To borrow a line from an 80's song, we've been able to get "money for nothing and our (imported) stuff for free."

But as countries like China and Russia start to avoid the dollar for their own international trading, they aren't going to need as many dollars. That means that the dollars we've printed over the decades that used to stay overseas will start finding their way back to the U.S. and become inflationary. It also means that we won't be able to just print dollars and export them overseas, which means we won't be able to buy as much stuff from other countries. It also means there will be fewer dollars for foreign countries to loan back to our government to fund the federal deficit.

The decision by Russia and China to abandon the dollar in their bilateral trades is significant--not just because of the $50 billion in annual commerce between the countries that will no longer be conducted in dollars, but because this may very well start the ball rolling for other countries to abandon the dollar in their bilateral trading as well.

The reckless policies of the Obama Administration and the Federal Reserve are going to have serious negative effects on our economy and our currency if they aren't stopped very soon."

depittydawg
11-26-2010, 10:51 AM
The reckless policies of the Obama Administration and the Federal Reserve are going to have serious negative effects on our economy and our currency if they aren't stopped very soon."


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I agree that Obama's failure to persuade congress to reverse the economic, trade, militaristic and fiscal policies the US has used for the last 30 years, is a problem. However, if the Chinese want to start collecting roubles it will be quite risky for them. I don't see this as much of a risk to the US at all.

menmon
11-26-2010, 11:29 AM
I agree that Obama's failure to persuade congress to reverse the economic, trade, militaristic and fiscal policies the US has used for the last 30 years, is a problem. However, if the Chinese want to start collecting roubles it will be quite risky for them. I don't see this as much of a risk to the US at all.

I remember like yesterday 1998. Roubles did not even make good toliet paper. The world had loaned them all kinds of money and they could not get their people to pay taxes, so they printed roubles like crazy, then it all came down, creating a credit crunch for all the 3rd world countries.

Buzz
11-26-2010, 02:41 PM
So, I wonder if this means that China is willing to stop buying dollars in order to keep the renminbi deflated with respect to the dollar. My guess is no, given that in an effort to cool inflation in China, their central bank opted against raising interest rates. Instead they chose to increase the reserves that commercial banks must keep in low interest accounts at the central bank. Reserves that the central bank uses to buy dollars. Hmmm.